Improvements or declines in these marketing profitability metrics provide a measure of company performance in addition to the company’s internal financial metrics.. Then explain how this
Trang 1CHAPTER 2
Marketing Metrics and Marketing Profitability
Introductory Exercise
FedEx measures customer satisfaction monthly but measures its service quality daily with a process metric that tracks the top ten mistakes, weighted by their negative impact on the customer, that result in customer dissatisfaction The day on which this internal forward-looking metric was at its lowest (fewest mistakes), FedEx produced its highest daily profit
1 Discuss the value of both measures (customer satisfaction and service quality) and how one relates to the other
2 Discuss why these are important forward-looking metrics, and how each contributes to performance
3 Discuss why FedEx’s profit would be at its highest when the company’s internal measure of service quality was at its lowest (fewest errors)
Teaching Objectives
Present the importance of marketing performance metrics and make clear the characteristics and roles of external and internal metrics and of forward-looking and backward-looking performance metrics
Illustrate how a market-based business continues to reengineer itself around markets as customer needs and competition change and new market opportunities emerge
Demonstrate the importance of market-level measures of profitability and how the mechanics of the net marketing contribution can be applied to a variety of marketing strategies
Harvard Business School Case Materials
Harrah’s Entertainment, Inc HBS Case 50201 Describes a situation facing Philip Satre, chairman and
CEO of Harrah’s Entertainment Inc Satre has just read a May 2000 Wall Street Journal story that discussed
the company’s marketing success in targeting low rollers, the 100 percent growth in stock price and profits for 1999, and the revenue growth of 50 percent, which significantly outpaced the industry The exciting article aroused Satre’s desire to know more about the activities of then-COO Gary Loveman and his team of
“propeller heads” with respect to their database marketing efforts and the Total Reward Program Satre was interested in two questions: He wanted to know how much these marketing efforts had contributed to Harrah’s overall performance and whether these marketing results were a one-time event or could be repeated year after year, especially as competitors move to introduce similar programs 27 pages
Buy Low, Sell High: Creating and Extracting Customer Value by Enhancing Organizational Performance
HBS Case 9-0597-0071 This case study provides a framework for creating customer value and managing firm-level profitability It focuses on the use of product line management and customer service to achieve customer satisfaction and high profitability
Guest First Hotel (A) HBS Case 9-602-099 Presents a hotel management situation in which customer
loyalty is linked to financial performance This case uses years of hotel data that students need to analyze to uncover the relationship between customer loyalty and financial performance Although there is no relationship in a single year, over time a key marketing profitability relationship emerges 4 pages
Winchell Lighting, Inc HBS Case 9-187-074 This case documents how a midsize lighting company tracks
it marketing costs, as well as unit costs and allocated costs, to more fully understand its profitability Teaching Note: 5-192-034 Supplement: 9-187-075
Direct Product Profitability at Hannaford Brothers Co HBS Case 9-591-002 Concerns the pioneering
use of a method of accounting in retailing which takes into account not only sales and the cost of goods sold but, at the item level, all of the variable costs associated with each item sold This case focuses on the strengths and weaknesses of Hannaford’s use of direct product profit and the opportunities for, and obstacles hindering, improvement and extension of the direct product profit system
Trang 2 The Customer Pyramid HBS Case CRM 211 This reading provides students with an insight into different
levels of customer profitability “The Customer Pyramid” provides a marketing management tool that strengthens the link between service quality and profitability 26 pages
Market-Based Strategic Thinking
1 How could marketing metrics help General Motors turn around its decline in sales and profits?
GM has many internal performance metrics with regard to production, employee productivity, and financial performance Metrics for these categories are standard for manufacturing companies The importance of marketing metrics rests in their external measurements of performance Ratings of customer satisfaction, intentions to repurchase, brand preference, and customer complaints provide an external scorecard for assessing current performance Many of these marketing metrics are forward-looking metrics that help forecast future performance For example, declining customer satisfaction and decreasing intentions to purchase GM vehicles in the future would signal a serious problem ahead Likewise, improvements in these marketing metrics would signal the potential for a bright future
2 If a company dominates a market the way Microsoft, Google, and Intel dominate their markets, why should that company bother to track marketing metrics?
All market leaders stumble at some point U.S Steel, GM, and IBM all seemed invincible at one time Without external marketing metrics, a company is vulnerable to listening to itself and not the voice of the customer Customer complaints, shifting customer preferences, customer satisfaction, and intentions to repurchase are valuable external barometers that can warn a company before declines in sales and profits occur A company could have many captive customers, unhappy but with no place to go When presented
an opportunity to buy elsewhere, however, these dissatisfied captive customers will exit en masse
3 How would marketing metrics help a company like McDonald’s better manage its profitability?
By measuring the net marketing contribution, marketing ROI, and marketing ROS of each of its restaurants, McDonald’s could better understand average performance as well as above- and below-average performance A portfolio performance analysis could be performed, similar to Figure 2-17, to show the overall company average and all stores in different regions, and the average performance for different regions Other marketing metrics like complaint behavior and customer satisfaction scores could be tied to these marketing profitability metrics to further illuminate and help improve the company’s performance
4 How would Toyota use forward-looking marketing metrics to better understand future sales and profits in the U.S market?
Changes in customer satisfaction, and particularly changes in the percentage of “very satisfied” customers, along with measurements of intentions to repurchase, provide external metrics of company performance that shape future sales and profit performance These forward-looking marketing metrics provide early warning signs of problems, but they can also be encouraging signs when the metrics are improving
5 How could a Wall Street analyst benefit from access to a company’s marketing metrics for a company like BioTronics?
Wall Street analysts could benefit from measuring a company’s marketing ROI and marketing ROS Improvements or declines in these marketing profitability metrics provide a measure of company performance in addition to the company’s internal financial metrics If the difference between marketing ROS and operating income as a percentage of sales is abnormally high, it would indicate excess company overhead Analysts could benchmark a company against publically traded peers, as in Figure 2-23, and they could also benchmark company performance against Fortune 500 companies, as in Figure 2-24
6 Why are most financial metrics backward-looking metrics?
Financial metrics like sales, percent gross margin, operating income, earnings per share, and all return
Trang 37 Why would chief financial officers and senior management be comfortable with net marketing contribution as a financial measure of marketing profitability?
CFOs and senior managers can easily see that the net marketing contribution is a financial metric derived from company accounting information The one additional step needed is to separate marketing and sales expenses from sales, general, and administrative expenses Some companies, though, already separate the expenses in their reporting, as shown in Figure 2-12 With this information, we need to only add two lines to the company income statement, as in Figure 2-9 There are no assumptions and no need to collect additional information We now have a financial-performance-derived measure of the contribution made by the company’s investment in marketing and sales Of course, for comparison, separate net marketing contributions can also be figured for the company’s product lines or markets, or for the businesses, divisions, or regions within the company
8 Compute Apple’s net marketing contribution for company’s last fiscal year and add it to Figure 2-22 Then explain how this level of net marketing contribution could be used in Apple’s marketing plans
to project Apple’s operating income for the current year
9 How would Vizio use net marketing contribution at the market level to increase its knowledge of the U.S flat-panel television market?
Net marketing contribution is sales times percent margin minus marketing and sales expenses There are several markets for flat-panel televisions in the U.S., including consumer households, corporations (trade shows and lobbies), restaurants and bars, heath care facilities (monitors), and airports (gate information) Each market has a net marketing contribution based on sales, percent margin, and the investment in marketing and sales expenses The NMCs of each market would tell Vizio the marketing profits of the markets Computing the marketing ROI and marketing ROS for each would make it easy for the company
to compare the markets with regard to marketing cost efficiency and profit impact
10 How would Procter & Gamble use a product-level measure of net marketing contribution for the Tide brand in the U.S market?
Tide is but one of nine brands in P&G’s detergent product line The others are Bold, Cascade, Cheer, Dash, Dawn, Dreft, ERA, and Gain Each has a net marketing contribution based on sales, percent margin, and marketing and sales expenses Computing the NMC for each brand allows P&G to see which ones contribute the most marketing profits to the product line and how much any one brand, such as Tide, contributes to marketing profits Creating a marketing profitability portfolio, as in Figure 2-17 (marketing ROI versus marketing ROS), showing the product line average, the company average, and each brand’s performance, would give P&G a clear understanding of the relative performance of each brand
Shown above are Apple’s 2010 financial results The net marketing contribution of
$22.58 billion is based on estimated marketing and sales expenses of $4.16 billion Apple’s operating income in 2010 was $18.82 billion
In the graph we can see how Apple’s net marketing contribution went through the roof in 2010 And, as shown, the pattern established between the net marketing contribution and operating income during the previous 10 years stays intact
Trang 411 How could Apple’s chief marketing officer use Figure 2-23 to explain to Apple’s CFO the value of marketing ROS and marketing ROI as corporate performance metrics?
CFOs are interested in financial numbers They are less impressed by survey data or the opinions of marketing managers Figure 2-23 is based on the financial results of Apple and four competing benchmark companies Both graphs show how marketing ROI and marketing ROS correspond to operating income Their relationship to operating income adds credibility to these two marketing profitability metrics Additionally, each graph demonstrates Apple’s superior performance with respect to its investment in marketing and sales expenses
12 Shown below are HP’s six major business segments and their percentages of sales for 2009 How would a marketing profitability portfolio (similar to Figure 2-17) help the HP chief marketing officer communicate to senior management the relative performance of each business segment when compared to the HP average
In 2009, HP as a company had a marketing ROS of 17 percent and a marketing ROI of about 200 percent (see Figure 2-23) Each of HP’s six major business segments also has a marketing ROS and a marketing ROI Both may be easily computed from existing financial data and used to create a graph similar to Figure 2-17 This marketing profitability portfolio would show the HP average and the average of each business segment, revealing which ones are bolstering the HP average and which ones are dragging it down
13 In 2009, Netflix had a marketing ROI of 178 percent What does this mean in terms of the company’s investment in marketing and sales?
A marketing ROI of 178 percent means that for each dollar Netflix invested in marketing and sales to grow the company, it produced $1.78 in net marketing contribution (after paying the $1 investment back) From the net marketing contribution, Netflix deducts its general and administrative expenses and other overhead
to figure its operating income If the company improved its marketing ROI to 200 percent, this would mean
it is producing $2 in net marketing contribution for every $1 it invested in marketing and sales expenses
14 For any airline of interest, compute its 2010 marketing ROS, marketing ROI, and operating income (as a percentage of sales) using the airline’s 2010 income statement in its annual report Assume marketing and sales expenses are 75 percent of SGA expenses Then plot the results in Figure 2-24 and interpret the airline’s performance
We have computed this information for three airlines As shown in the table, the airlines’ operating incomes
as a percentage of sales varied with the airlines’ marketing ROS and marketing ROI When compared to the averages shown in Figure 2-24 for 2009, all three airlines were below average Delta had the best performance and US Air the worst
15 Why would companies that sell energy and raw materials, such as ExxonMobil and Alcoa, have very large marketing ROIs
These companies have gross margins from about 18 to 39 percent, as shown in the table But what makes their marketing ROIs so high is their low level of marketing and sales expenses as a percentage of sales For both companies, the investment in marketing and sales is less than 3.5 percent of sales This makes the denominator of the marketing ROI equation small relative to Fortune 500 companies in other sectors
Trang 5Marketing Performance Tools and Application Exercises
2.1 Company-Level Net Marketing Contribution: Figure 2-15 is used with this marketing performance tool to
address analysis items A (next page) and B (page 19) The starting data are shown here to make comparisons with the analysis items easy
Trang 6A Evaluate the profit impact of eliminating the casual shorts and knitted sweaters product lines
Teaching Note: Sales drop by $25 million and the net marketing contribution drops by $3 million More
importantly, net profit (before taxes) falls by 30 percent, from $10 million to $7 million The point for students to understand is that, as long as the market profit is positive, it is contributing to other fixed costs and profits The $20 million in operating expenses is not product related but represents overhead expenses that will still occur without these two product lines Then the operating expenses would have
to be covered by the remaining product lines
Trang 7B What would be the profit impact of increasing market share from 2 to 3 percent for the casual shorts
product line if marketing and sales expenses were doubled ($1.5 million to $3 million)?
Teaching Note: While this strategy would produce $5.1 million more in sales, the net marketing
con-tribution would drop by $200,000 The gains in market share and sales are not enough at current
margins to offset a $1.5 million increase in marketing and sales expenses As shown, this loss drops to
the bottom line where net profit (before taxes) also drops by $200,000 You could instruct students to
search for the market share needed to make this strategy equal the current net marketing contribution
(starting data) This exercise produces an interesting benchmark, as the needed market share would be
the minimum share level required to keep the strategy from adversely impacting net profit
Trang 82.2 Market-Level NMC, Marketing ROS, and Marketing ROI: Figure 2-18 is used with this marketing
performance tool to address analysis items A (next page) and B (page 22) The starting data are shown here to make comparisons with the analysis items easy
Trang 9A Evaluate the profit impact of exiting the fashion segment
Teaching Note: This would be a disastrous decision Despite a low pretax net profit of $300,000, the
fashion segment generates $6.8 million in marketing profits This amount covers the $6.5 million in allocated operating expenses, which the business would have to pay regardless of whether it exits this segment While the strategy lowers the marketing budget by $6.5 million, the business’s overall net profit would be reduced by $6.8 million, the exact amount of the current net marketing contribution for the fashion segment
Trang 10B In the fashion segment, how much market share would the business have to obtain to keep the same level of marketing profits if the business doubled marketing and sales expenses in that segment?
Teaching Note: The current market share of 3.5 percent would have to increase to 5.2 percent to
maintain a net marketing contribution of $6.8 million when the marketing and sales budget is doubled to
$13 million As shown, this level of market share also holds net profit at $10 million, while sales increase by $18 million These data provide a basis for a discussion around profitability and market share Is it reasonable to expect the business would gain 1.7 percent in market share if it doubles the marketing and sales budget? Obviously, the larger the share gain needed to hold profits, the greater is the risk of lower profits